IMKTA - NASDAQ

Jim Lanning - CEO Ron Freeman - CFO Robert Ingle II - Chairman of the Board

Dave Cooke - Wells Fargo Damian Witkowski - Gabelli & Company

Good day, and welcome to the Ingles Markets Second Quarter 2016 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Chief Financial Officer, Mr. Ron Freeman. Please go ahead, sir.

Thank you and good morning. Welcome to the Ingles Markets fiscal 2016 second quarter conference call. With me today are Robert Ingle II, Chairman of the Board, and Jim Lanning, Chief Executive Officer. Statements made on this call include forward-looking statements as defined by and subject to the Safe Harbors created by Federal Securities laws. Words such as expect, anticipate, intend, plan, believe and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance, and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed on this call. Ingles Markets does not undertake to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. For a description of factors that could cause actual results to differ materially from that anticipated by forward-looking statements, you are referred to the company's public filings, including the Form 10-K for the fiscal year ended September 26, 2015. In accordance with a long-standing company policy and in recognition of the extremely competitive nature of our industry, this call will not address individual competitors or Ingles' marketing strategies other than what is included in the company's filings. This morning, I'll provide you with a summary and six month results followed by additional comments. Following my remarks in today's call, I'll be available to answer any questions you have about our latest quarterly results. Going forward, we will issue quarterly press releases to report our results and discontinue our quarterly conference calls. However, I want to assure you that we value your interest and investment in Ingles Markets. In the future, I'll as always be available to respond to your questions on one-on-one basis and I look forward to speaking with each of you next quarter after we have released our quarterly results. Our press release, issued this morning, is available on our website at www.ingles-markets.com. Our 10-Q for the quarter was filed a few days ago and is available on our website as well. We achieved higher sales and net income for the three months ended March 26, 2016 compared with the three months ended March 28, 2015. Net income, total 14.4 million for the quarter ended March 26, 2016, compared with 14.3 million for the second quarter ended March 28, 2015. Net sales also increased despite significantly lower retail gasoline prices this quarter compared with second quarter of last fiscal year. For the six months ended March 26, 2016, net income totaled 27.3 million compared with 29.3 million for the six months ended March 28, 2015. The main reason for this decrease is the gasoline gross profits were significantly higher during the fiscal 2015 six month period compared with the current year fiscal six months period. The three and six months period ended March 2016 benefited from extra Easter sales. Easter occurred in March 2016, but didn't occur until the third quarter of last fiscal year. First a description of our second quarter results, second quarter fiscal 2016 sales increased 1% to 924.3 million, an increase of 9% from last year's second quarter sales. Comparable store sales excluding gasoline increased 1.2%. Lower gasoline sales were offset by higher sales on other products and by the positive affected Easter sales. Excluding Easter sales excluding -- gasoline sales and the effective extra Easter sales, retail growth re-comparable stores sales increased 1.6 over the comparative fiscal quarters. Gross profit for the March 2016 quarter increased 4.6% to 228.7 million compared with 218.7 million for the second quarter of last fiscal year. Gross profit as a percentage of sales was 24.7% for the March 2016 quarter compared with 23.9% for the March 2015 quarter. Excluding gasoline sales grocery segment gross profit as a percentage of sales increased 23 basis points comparing the second quarter of fiscal 2016 with the same fiscal 2015 period. Operating and administrative expenses for the March 2016 quarter totaled 196.2 million compared with 185.6 million for the March 2015 quarter. Interest expense totaled 11.2 million for the three-month period ended March 26, 2016 and 11.6 million for the three months period ended March 28, 2015. Total debt at the end of March 2016 was 907.7 million compared with 928.5 million at the end of March 2015. Net income totaled 14.4 million for the three-month period ended March 26, 2016 compared with 14.3 million for the three-month period ended March 28, 2015. Net income as a percentage of sales was 1.6% for both the 2016 and 2015 second quarters. Basic and diluted earnings per share for our publicly traded Class A common stock were $0.73 and $0.71 respectively for the quarter ended March 26, 2016 compared with $0.72 and $0.71 respectively for the quarter ended March 28, 2015. Now we will talk about our first half results. First half fiscal 2016 and 2015 sales each totaled 1.88 billion. Retail grocery re-comparable store sales excluding the effect of gasoline and extra Easter sales increased 1.5%. Gross profit for the six months ended March 26, 2016 increased 2.5% and totaled 454.4 million compared with 443.1 million for the first six months of last fiscal year. Gross profit as a percentage of sales was 24.2% for the March 2015 six months period compared with 23.6% for the March 2014 six months period. Excluding gasoline sales retail grocery gross profit a percentage of sales increased 8 basis points comparing the first half of fiscal 2016 compared with the same fiscal 2015 period. Gasoline gross profit dollars were lower for the six months ended March 26, 2016 compared with the six months ended March 28, 2015. Operating and administrative expenses totaled $390.2 million for the six months ended March 26, 2016 and 372.6 million for the six months ended March 28, 2015. Interest expense decreased 1.7% from 23.2 million for the March 2016 six month period compared with 23.6 million for the March 2015 six month period. Net income totaled 27.3 million for the six month period ended March 26, 2016 compared with 29.3 million for the six month period March 28, 2015. Net income as a percentage of sales was 1.5% for the six months ended March 2016 compared with 1.6% for the six months ended March 2015. Basic and diluted earnings per share for publicly traded Class A Common Stock were $1.39 and $1.35 respectively for the six months ended March 26, 2016, compared with $1.49 and $1.45, respectively, for the six months ended March 28, 2015. Capital expenditures for the March 2016 six months period totaled 71.2 million, compared with 44.3 million for the March 2015 six months period. The increased capital expenditures this year are focused on stores scheduled to open later this year as well as ongoing improvements to the existing store base. Capital expenditures for the entire fiscal year are expected to be approximately 125 million to 145 million. The Company currently has lines of credit totaling 175 million of which 135.9 million is currently available. The Company believes its financial resources, including these line of credit and other internal and anticipated external sources of funds, will be sufficient to meet planned capital expenditures, debt service and working capital requirements for the foreseeable future. To summarize, we are pleased with our sales growth and remain committed to improving our store base and increasing customer satisfaction. We will continue our efforts to keep to momentum going for the remainder of this year. We will now take your questions.

[Operator Instructions] And we'll move first to Bryan Hunt with Wells Fargo.

It's actually Dave Cooke on for Bryan. Wanted to first touch on inflation and deflation, can you talk about the -- what you saw in the quarter as well as your outlook for the rest of the year?

There is a little bit of uptake in inflation but it tends to vary from department to department, milk prices are actually down, seeing a little bit a relief in produce and lot of other things are holding steady, so it is not to same behavior across the board.

Okay. How about a promotional intensity, same sort of thing, what you saw in the quarter as well as your outlook for the year?

I'm not sure, I understand, what's your meaning by promotional activity

I guess, what you're seeing from your competitors?

Well again, we don't speak to the activities of our competitors, we have our own marketing programs that focused on what we try to do well.

Okay. Click and collect, seems to be a big story in the industry these days, can you talk about -- are you guys exploring that option? Do you think it make sense for your customer base, how you're thinking about that?

We are exploring a number of different options on how our customers can pay us and how they can access products they want in our stores. We do not have anything, any announcements that we're ready to make on which correction we're taking there right now, but certainly it's something to be consider and we're well into doing that.

Okay and your fluid dairy processing business, do you continue believe that that's a strategic asset for you all?

Absolutely. It provides our stores with a steady source of milk. It provides actually two-thirds of its business to folks who aren’t our stores, so it's a good diversity of revenue stream for us and that business performs very well.

Okay and then the last one from us, any thoughts on Lidl and Wegmans entering into the North Carolina market? Do you view that as a sizable threat?

We view that as, talking about our competitors which we preferred not to do.

Alright, that's all for me, thanks.

[Operator Instructions] We'll move next to Damian Witkowski with Gabelli & Company.

Hi, Ron. You said, you're expecting to open stores later this year, how many would you expect to open by the end of this fiscal year?

Two or three, we got those in process right now and couples of other ones pretty close, so again it's at accelerated pace of new building over what we’ve done in the last couple of years.

And at these are new locations, they are not replacement of stores?

No, they actually are replacement buildings in this case.

Okay. So, the net stores number will stays at same or?

That's correct.

Okay and then

Square footage will grow but the net numbers will stay the same.

Sure, how much bigger are they getting by the way on average versus --?

It's easily in the tens of thousands square feet.

Per store?

Per store, yes.

Okay and then you've said your fuel margins were down significantly year-over-year, if I look at the industry, the industry is actually up slightly on average I think. So is there anything in particularly going out are you doing more promotions to drive [indiscernible] stores or any light if you can shed on that would be great.

Well Damian what period are you talking about?

Well, the first quarter, same. If I look at some of the first quarter results for pure plays and convenient store space, there fuel margins are actually up slightly. Not a lot but they're up year-over-year.

You got to remember, where this -- we're talking about out six months results here and our December quarter which was our first one. I think industry wide the December ’14 quarter was much better than the December ’15 quarter.

Okay, so that mean that your first quarter -- your first to second quarter, but the December to March calendar quarter was down significantly?

No, other way around. The March quarter themselves are pretty close to each other. It was the December ’15 quarter versus the December ’14 quarter.

Okay, so I misunderstood. And on the operating expense side it continues to grow year-over-year, it looks like majority of it again is labor and I think the last time we spoke about it was really driven by the fact that you're increasing labor in service areas in fresh offerings just to drive those sales and such, is that what's continuing to drive those increases or is it something else?

Well, there is certainly that and also in our region we're just starting to feel some overall tighter labor markets and we're having to respond to that.

Okay and then lastly Ron, on the whole EMV thing, the debit -- the credit card thing where -- with the trip [ph] and everything else that kind of shifts the liability now from the issuers of the credit card to the retailer if they don't have the chip installed, are you actually complying with that and if not are you planning to be and in the meantime how's that effected your gross margin because your charge base has gone up?

Well, we're compliant with it and we have not noted any detectable influence on our gross margin.

[Operator Instructions] And it appears there are no further telephone questions.

Okay, thank you for joining us today everyone and again be on the lookout for our press release in early August to report our June results. Everyone have a really nice day.